Employment Risk And Household Formation: Evidence From Differences In Firing Costs

The rate of new household formation among young adults who live with their parents has decreased in the last twenty years, especially in Southern Europe. At the same time, exposure to the risk that a young adult loses his or her job has increased. The authors use differences in firing costs across contract types in the Spanish labor market to identify if there is a causal link between both developments. The first identification strategy exploits a legally-induced sharp increase in firing costs 3 years after the starting of a fixed-term contract between 1987 and 1996. The second uses variation in regional incentives to promote high-firing cost contracts between 1997 and 2001.